Afghanistan's economy: a state that lived on outside money

Why the Afghan state lived on subsidies

Afghan governments have always taxed their own people lightly. Britannica describes the country as a rentier state, financed far more by foreign subsidies and export taxes than by internal taxation and better at distributing resources than at collecting them. The pattern is old. The Durand agreement of 1893 raised Britain's annual subsidy to the emir from 1.2 to 1.8 million rupees, and from 1905 to 1919 the government of India paid 18 lakh rupees a year in return for conducting Afghan foreign policy.

The first development plans were paid for the same way: from 1956 to 1979 foreign aid, mainly Soviet and American, covered more than four-fifths of government investment and development spending, by Britannica's account, and when aid declined in the 1970s gas sold to the Soviet Union made up the difference. In 1952 the government created the Helmand Valley Authority, modelled on the Tennessee Valley Authority, to irrigate the Helmand and Arghandab valleys, and in 1956 the government promulgated the first of a long series of development plans. With Daud Khan as prime minister from 1953 to 1963 the Soviet Union became the main source of aid and trade, and Britannica recalls the country's description as an "economic Korea" where the two Cold War blocs competed to build. Natural gas, first tapped in 1967, earned about US$300 million a year in the 1980s, 56% of export revenue, and about 90% of it went to the Soviet Union to pay for imports and debts. The fields were capped during the Soviet withdrawal in 1989.

After 2001 the arrangement returned in a larger form. The interim government and its successors relied mainly on foreign aid and on subsidies from donor governments, and the International Monetary Fund recorded growth of 30% and then 20% in the two fiscal years to March 2004, which it attributed mainly to UN assistance. The return of more than 5 million expatriates was a main driver of the recovery by 2010, along with construction and telecommunications; telecoms alone drew more than US$1.5 billion of investment and more than 100,000 jobs after 2003.

What happened when the money stopped

The World Bank lists what August 2021 took away. Aid fell steeply and with it demand; the country lost access to the international banking system; the central bank's foreign exchange reserves held abroad were frozen; investment confidence collapsed and tens of thousands of skilled Afghans left. The World Bank and the IMF halted their own payments. The United States froze about US$9 billion belonging to Da Afghanistan Bank.

The economy is estimated to have shrunk by about 20% after the takeover, and by October 2021 more than half of a population then put at 39 million faced acute food shortage. It then stabilised. The Wikipedia article on the economy attributes this to restrictions on smuggled imports, limits on banking transactions and UN aid, and records stable exchange rates, low inflation and steady revenue collection from 2023; in the third quarter of 2023 the afghani rose more than 9% against the US dollar. Customs tariffs brought in 61 billion afghanis in 2022 and 76 billion in 2023.

The World Bank's country overview puts growth at 2.5% in 2024 and projected 4.3% for 2025, led by agriculture, mining, construction and services, with low inflation, better revenue and spending by returning migrants behind it. It also records per capita income stagnating as the population grows, a fragile banking sector with rising bad loans, a widening trade deficit and the restrictions on women's work as risks. UNESCO put the share of Afghans below the poverty line at about half in 2025.

Aid has not stopped entirely; it has been rerouted around the government. Under what it calls Approach 2.0, approved on 1 March 2022, the World Bank channelled more than US$1.3 billion from the Afghanistan Resilience Trust Fund through UN agencies and non-governmental organisations for health, education, food and water. Approach 3.0, endorsed in February 2024, adds grants from the International Development Association on the same terms. All of it is kept outside the systems of what the Bank calls the Interim Taliban Administration.

What Afghan farms produce

Farming and herding are the base, and most of it is for the household. Britannica counts only about one-eighth of the land as arable and about half of the cultivated land as irrigated, and traditionally up to 85% of the population drew a living from the rural economy. The Wikipedia article on the economy puts 60 to 80% of the working population in agriculture, which yields less than a third of output.

Wheat is the staple and was put at 4.83 million tonnes in 2024; the country still needs more to be self-sufficient. Fruit and nuts are what it sells abroad: dried fruit exports reached US$667 million in 2025, pistachios grow in the north and west, and pine nuts in Paktika, Paktia, Khost, Nangarhar, Nuristan and Kunduz. About 12,000 hectares grow saffron, mostly in the west, north and south and above all in Herat, and output reached 19,469 kilograms in 2019, a crop farmers and officials have promoted as a replacement for the poppy.

Livestock gives meat, milk, wool for carpets and the skins of the karakul sheep, long an export. A drought in 2000 killed some four-fifths of the livestock in the south. Cannabis, which Afghanistan grew widely in 2010, was banned by decree in March 2023.

Industry has always worked the same raw materials. Britannica lists cotton textiles as the most important manufacture in peaceful times, with cement, sugar, vegetable oil, soap, shoes and woollen cloth, a fertiliser plant at Mazar-e Sharif built on local gas and a cement works at Pol-e Khomri. The Wikipedia article on the economy counts more than 5,000 factories, most locally owned, making building materials, furniture, clothing, food and medicines. Carpets, woven by hand and traditionally by women, remain an export, as do cashmere and leather. An estimated 400,000 people enter the labour market each year.

How the poppy ban changed the countryside

Opium paid better than any legal crop. Within a few years of 2001 Afghanistan was estimated to produce more than nine-tenths of the world's opiates, and Britannica notes that the Taliban and supporters of the central government alike took an income from it. Its spread into the southern deserts was made possible by diesel pumps from China and Pakistan and, in the 2010s, solar-powered ones.

The Taliban then banned cultivation. The United Nations Office on Drugs and Crime measures what followed each year.

Farmers' income from opium fell from US$260 million in 2024 to US$134 million in 2025. The price of dry opium fell 27% that year to US$570 a kilogram, still about five times the pre-ban average. Many farmers moved to cereals, but UNODC found more than 40% of farmland lying barren in 2025 because of drought and low rainfall, and the return of about four million Afghans from neighbouring countries, about a tenth of the population, has sharpened competition for work. Seizures of methamphetamine in and around Afghanistan were about 50% more frequent by the end of 2024 than in the third quarter of 2023, which UNODC reads as organised crime moving from plants to synthetics.

What lies under the ground

The mineral estimates are large and old. Surveys by the US Geological Survey in 2007 led US and Afghan officials to value untapped deposits at at least US$1 trillion in 2010, and a Pentagon memo spoke of the country as a possible "Saudi Arabia of lithium". Britannica lists high-grade iron ore at Hajigak, copper at Aynak near Kabul, uranium east of Kabul, copper, lead and zinc near Kunduz, chrome, beryl, bauxite, lithium, gold and the lapis lazuli of Badakhshan. The Khanashin carbonatite in Helmand holds an estimated one million tonnes of rare earth elements.

Very little has been dug. The Aynak copper deposit was leased in 2007 to the China Metallurgical Group for 30 years, at a figure the Wikipedia country article gives as US$3 billion and the economy article as US$2.8 billion. The Hajigak iron deposit, 210 kilometres west of Kabul, was awarded to the state-run Steel Authority of India. In 2011 the China National Petroleum Corporation took a contract for three oil fields along the Amu Darya, and in early 2023 a Xinjiang company signed a similar contract with the Emirate. In September 2023 the Taliban signed mining contracts worth US$6.5 billion for gold, iron, lead and zinc in Herat, Ghor, Logar and Takhar. Taxes on lapis lazuli and emeralds helped pay for the anti-Taliban forces during the civil war.

How goods cross a landlocked country

Every import and export crosses a neighbour. Britannica notes that the country depends on its neighbours' transit facilities and has few navigable rivers, and that the roads built in the 1960s were laid to connect the main towns with the railheads at Gushgy and Termez to the north and Chaman and Peshawar to the south. The Afghanistan-Pakistan Transit Trade Agreement lets Afghan trucks carry exports across Pakistan to the Indian border at Wagah, and the country has access to the Pakistani ports of Gwadar and Port Qasim and the Iranian ones at Bandar Abbas and Chabahar.

Those routes are hostage to politics. When Pakistan closed the border in August 1961 the country turned to the Soviet Union for transit, and in 2018 84% of exports went to Pakistan and India. Rail barely exists: a 75-kilometre freight line runs from Mazar-e Sharif to the Uzbek border and two short links cross from Turkmenistan. Power comes the same way. In 2016 the country generated about 1,400 megawatts, mostly from hydropower, and still imported most of its electricity from Iran and Central Asia.

Three projects would route other countries' trade through Afghanistan. The TAPI pipeline, whose construction in Afghanistan began in 2018, would carry gas from Turkmenistan some 1,750 kilometres, mostly through Afghanistan, to Multan in Pakistan. CASA-1000 would carry electricity from Tajikistan and Kyrgyzstan to Pakistan, and the World Bank has allowed work on the Afghan section to resume with payments kept outside the country. A Trans-Afghan Railway has been proposed. Russia's trade with Afghanistan came to US$323 million at the end of 2024, by Carnegie's figure.

What the afghani and the banks look like

Da Afghanistan Bank, the central bank, issues the afghani. In the decades after independence it financed cotton growing in the north, where the Spinzar Cotton Company of Kunduz sold most of its crop to the Soviet Union. Formal banking has always been thin. Britannica notes that private money traders have provided nearly all the services of a commercial bank, and cash is still used for most transactions.

The currency has been through several shocks. Inflation from the 1990s led people to settle large transactions in precious metals and gems. UN sanctions in 1999 froze the government's accounts abroad and closed Afghan bank branches outside the country, and during the US campaign of 2001 the Taliban and al-Qaeda removed large amounts of bullion and currency. The freeze of 2021 repeated the first of those, on a larger scale. The World Bank now describes the sector as fragile, with regulatory uncertainty, rising non-performing loans, tight liquidity and little lending.